Blog

Handouts to Wall Street Announced

Monday, October 13, 2008, 8:00 PM

Once again, the "will of the people" was overridden by Congress in their haste to respond to an "emergency," and, once again, it turns out the people's instincts were right.

Remember the initial $250 billion that was going to be used to buy troubled assets which "we had to do right away!" because otherwise there would have been untold misery and millions of jobs lost?

Turns out we don't need to buy any of those assets right away after all.

Who knew?

Quote:
WASHINGTON — The Treasury Department, in its boldest move yet, is expected to announce a plan Tuesday to invest up to $250 billion in large and small banks, according to officials. The United States is also expected to guarantee new debt issued by banks for a period of three years, officials said.

Link (NYT)

Instead, the money will be used to buy bank stock, which is a great deal if you are a bank, because you get cash equity and probably a nice boost to your stock price (I am cynically assuming that the government is not going to get the best price here....).  And these purchases will be non-dilutive to existing shareholders.  I was okay with the notion of capital infusions, but I am astounded to hear that they will be done in this manner to save existing shareholders.

Even more startling to me is that, instead of slapping the banks firmly on the wrist for being reckless, the government is also "expected to guarantee new debt issued by banks for a period of three years."  To put it bluntly, that is just not the way to combat the moral hazard that is clearly endemic to our current banking system. I think the banks should be kept fully on the hook for any loans they make from here on out....mess up again, and your institution goes under.

Next, if you read the list of handouts below, things get even more troublesome (if your measure is "enormous rewards for Wall Street for misbehaving bother me").

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

A few of those companies are not even in trouble, at all, and yet they are about to receive billions and billions of dollars.  Apparently there is a $5 billion reward for acquiring a competitor....I wonder how many knew about that when they were at the bargaining table?  I would bet quite a few of them.

Wait, it get's better:

The goal is to inject massive liquidity into the banking system. The government will purchase perpetual preferred shares in all the largest U.S. banking companies. The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.

First, this is NOT a liquidity injection, this is a capital injection, and there's a big difference.  Second, this deal could not possibly be any sweeter for any of the bankers or their shareholders.  It amounts to a gigantic reward for playing risky and getting caught.  Executive positions and shareholders are to be spared.

I am now squinting anew at the market sell-off last week, because it served to inject a lot of fear into the government and G7 negotiations at a critical moment that paved the way for the largest and most massive bailout ever in history. Strangely good timing, for the banks.

I called this a looting operation at the outset, and my suspicions are now largely confirmed.

After these trillions of dollars have been spent and distributed to the least worthy institutions on the planet, you will discover a few oddities along the way:

  • Government debts will balloon enormously.
  • No new jobs will be created.
  • House prices will continue to fall and foreclosures will continue to mount.
  • The real economy will have received practically zero benefit.
  • Bridges, roads, and schools will still be in poor repair.
  • States will still be hurting for revenues.
  • We will still have no national energy plan.

In short, none of this money is directed at the real economy.  All of it is directed at the institutions that created this mess in the first place, and which, honestly, feast on the productive economy. 

This was, quite simply, the largest-ever transfer of public monies to private parties with the least amount of public gain.

We're going to be paying for this for a long, long time.

Oh, well, I suppose it is all history now.  Time to sit back and see how the bond markets respond to all this new borrowing.

Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

26 Comments

srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Re: Handouts to Wall Street Announced

[quote]Remember the initial $250 billion that was going to be used to buy troubled assets which "we had to do right away!" because otherwise there would have been untold misery and millions of jobs lost?[/quote]

Anyone with more than two brains cells should have been able to figure out that:

1) The economy can't destroy itself in the span of one month.

2) Any plan involving the buying of massive amounts of asset takes a lot of time

So, Yawn old news. Though, this and the long pause after the bailout was approved both prove that what many individuals (including, shockingly, some of our congressmen -- which is why the bailout didn't pass in 2-days) deduced in the first place.

[quote] Even more startling to me is that instead of slapping the banks firmly on the wrist for being reckless, the government is also "expected to guarantee new debt issued by banks for a period of three years". [/quote]

That has everything to do with capital flight fear Chris. Though I'm sure Paulson finds the idea positively delightful.

What bothers me about this insanity though, is guaranteeing debt is rather like having a guy outside a casino that says: Any money you lose, I'll redeem. Which bypasses mere moral hazard and stops directly at pure insanity.

 

[quote] First, this is NOT a liquidity injection, this is a capital injection and there's a big difference there.[/quote]

And thank god they've finally took a step toward the root problem. A few more giant leaps and we might actually start addressing it. Of course, we won't have any money to do anything at this rate...

[quote]

I am now 100% suspicious of the timing of the market sell-off last week because it served to inject fear into the government and G7 negotiations at a critical moment that paved the way for the largest, and most massive bailout ever in history.

[/quote]

Bah. Take off the tinfoil cap, Chris. If they wanted to do that, they would have announced this plan and started it over the weekend. That way it'd coincide with the bullish counter rally pressure that had been building all last week -- (you know, all those oversold! oversold! and 'has it hit bottom?' articles).

But perhaps the idea of Paulson having strategic sense is a bit nutty in its own right. Wink

.

.

 

The big question though is: What kind of dividends are we getting?

Cause, thats what is going to determine whether Paulson just raped the banks, or finished sodomizing the taxpayers.

 

Addendum:

[quote]And these purchases will be non-dilutive to existing shareholders. I was OK with the notion of capital infusions, but I am astounded to hear that they will be done in a manner to save existing shareholders.[/quote]

I'll add that calling any preferred share non-dilutive is... well, magical Enron accounting. It probably won't take too many days for people to realize that.

--

Steve

jgreco's picture
jgreco
Status: Bronze Member (Offline)
Joined: Aug 9 2008
Posts: 31
Re: Handouts to Wall Street Announced

Sad that Buffet got a better deal then the taxpayers.  Paulson is a real chump.

The only saving grace of this is that we are finally addressing the problem with these banks (solvency) instead of the symptom (liquidity).

Ray Hewitt's picture
Ray Hewitt
Status: Gold Member (Offline)
Joined: Apr 5 2008
Posts: 458
Re: Handouts to Wall Street Announced

Using fear to expand power. It's is an old game that always seems to work. Government is the enemy of the people. They're not stupid; they're master criminals. They'll bring down the economy if they have to, to maintain power. Count on it.

Here's another one Peter Schiff discovered.

Just stop paying your mortgage

If you are a mortgage holder who is either struggling with crushing payments, bitter for having overpaid for your home during the bubble, or who has extravagantly refinanced when prices were rising, the government's landmark $700 billion bailout package has an important message for you: stop making your mortgage payments . . . immediately. Furthermore, if you believe that with some planning and sacrifice you may be able to meet your mortgage obligations, the government's message is clear: relax, don't bother. 

http://www.signonsandiego.com/uniontrib/20081010/news_lz1e10schiff.html

ashtonw's picture
ashtonw
Status: Member (Offline)
Joined: Aug 7 2008
Posts: 23
Are you really that surprised?

"I was OK with the notion of capital infusions, but I am astounded to hear that they will be done in a manner to save existing shareholders. Even more startling to me is that instead of slapping the banks firmly on the wrist for being reckless, the government is also "expected to  guarantee new debt issued by banks for a period of three years"."

 Are you seriously that surprised?  You can always count on the people in power to take the worst of all options, and you of all people are clearly aware of this.  Next time there is some momentous blunder by the feds, just say "wow I'm not surprised by how stupid they are, seeing all the stupid things they have done to date"  Their foolishness has only begun, I believe, and they, along with most of the American sheeple will fight to the bitter end defending a monetary/energy system that just straight up does not work.  I wouldn't be surprised if the feds have us living in military camps in Siberia waiting to strike Pyongyang in five years, and telling us that after this war, we can all go back to suburbia.  It just doesn't end; it never has, and it never will.  Fundamental human psychology.  Like you said Chris:  This time, its probably not different.  

 Another question, one which I think would make a great next article, martenson report, whatever:  

 If you were put in a position of power, like the President, Treasury Secretary, whatever, what would you do?  What would your plan be?  Would you totally dismantal the system and start from scratch?  Tell everyone to go hide in a cave? 

 I am eagerly awaiting chapter 20, but that seems like it will be about how to survive it, not fix it, since that is the only position any of us are in.   Aside from the fact that this mess is unfixable in the traditional sense, what would you do in a position of power?

 

srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
A Long, long time ago...

[quote]Their foolishness has only begun,[/quote]

I assure you, this foolishness began a long, long, long time ago.  Tongue out

--

Steve 

Keemo's picture
Keemo
Status: Member (Offline)
Joined: Oct 13 2008
Posts: 4
Re: Handouts to Wall Street Announced

Chris,

I just discovered your site via tickerforum and would like to thank you for all the work you've put in here, your crash course videos are top notch.  I will be sharing them with friends.

It's a sad time in our country's history.  I look forward to reading your analysis in the future.

Thanks,

Keemo 

ashtonw's picture
ashtonw
Status: Member (Offline)
Joined: Aug 7 2008
Posts: 23
Re: A Long, long time ago...
It sure as heck did, starting with Mr. Snake in Eden. Damn women!  But seriously what I mean is that the really foolish foolishness is just getting started.  Soon we will look back on today and see how foolish we were to think that we were actually being foolish, when at that point we will be so foolish that the meaning of the word foolish will have to be completely re-thought.  How foolish of us...
gauntlett's picture
gauntlett
Status: Martenson Brigade Member (Offline)
Joined: Aug 25 2008
Posts: 49
Bonds
Is it safe to assume that bonds are moving towards falling off a cliff as interest rates begin to climb?
srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Re: Bonds

[quote] Is it safe to assume that bonds are moving towards falling off a cliff as interest rates begin to climb?[/quote]

If you mean bond prices, then yes.  Bond prices will fall in direct relation to the gain in interest.   How much will interest rates gain, and how fast?  Nobody knows.   That all depends on how long and how much the United States and the European Union can suck up credit before the horrible slurping sound starts.   Since that is dependent on a host of shadow factors it could blow up tomorrow, it could blow up in three months.

 

Since we are on the subject, let us gander in awe at the mother bubble:

Behold, the mother of the bubbles

 

--

Steve 

VeganDB12's picture
VeganDB12
Status: Platinum Member (Offline)
Joined: Jul 18 2008
Posts: 731
Re: Handouts to Wall Street Announced

I have followed this blog for several weeks and track several other finance blogs and the Times and the Journal. I have moved through the stages of loss.  I thought I accepted the potential downside to this enormous economic crisis but had kept faith in my government in some small way.   I was raised by one of the few basically honest concerned politicians know to mankind.  This must have obscured my judgment.

As much as I want to say it ain't so, following these handouts, when I see photos of the billionaire CEO's of these banks and Treasury Secretary Hank Paulson, all I see is friends helping friends. As a debt free loyal US citizen I feel completely abandoned by my government and I feel robbed. My retirement account is devastated and my friends and peers are facing foreclosure and unemployment.  I now personally know several people who have lost businesses or have been laid off in the past 6 weeks. None of this will change thanks to this intervention. I live in New York and we are in for a very bad year.  My roads are already in bad shape, unemployment in Yonkers is high and our schools are suffering. This can only get worse for those in my little circle. And people are still in denial. Yikes. 

 

 

gauntlett's picture
gauntlett
Status: Martenson Brigade Member (Offline)
Joined: Aug 25 2008
Posts: 49
Re: Bonds
Shucks that is pretty...  You pretty much answered my question, but I'm also wondering what factors will contribute to a fall in bond prices as this bubble also bursts.  And we thought the stock market was a big bubble...
davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5058
preferred shares not dilutive?

Steve, I thought preferred shares are nothing more than bonds under a different name.  No voting rights, a fixed dividend, that sort of thing.  And since they're bonds, they are not dilutive, since they aren't counted in the totals for EPS.

Of course, 10% isn't exactly cheap money.  Trying to make money when your cap cost is 10% will be - challenging.  But at least they'll be in business for a while longer.

I know Buffet got warrants to go along with his 10% preferred.  Now those are dilutive, because of course they allow Warren to buy common stock, but only if it's to his advantage to do so.

jeffgerritsen's picture
jeffgerritsen
Status: Member (Offline)
Joined: Aug 10 2008
Posts: 10
Re: Handouts to Wall Street Announced

I'm absolutely sick over this bailout fraud.  We are going to pay these thugs and thieves money because they screwed up and got caught?

Have we lost our minds? 

This is the stuff nations collapse, revolutions, and wars are made of!   No one comes away unscathed from a fiasco such as this.

Talk about getting the short end of the stick - we pay these bastards for screwing up and in return our roads, bridges, schools, rail system, and electrical distribution system is still in shambles.  I submit for your consideration we would be better off to be raped and sodomized rather than bail out these morons.  For what these bastards have done to us our grandchildren and great grandchildren will still be paying for this fiasco!

steff66's picture
steff66
Status: Member (Offline)
Joined: Aug 12 2008
Posts: 3
Re: Handouts to Wall Street Announced

I am woundering where one could place the money so one will not suffer when the bond market falls.

Is it short intrest or long?

Or any other? I hear many economy experts saying that equity is the place to be now? But this sound very risky..

What do you think?

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
"I work for the People. Our headquarters is on Red Square."

So the Goldman Sachs TreasSec and the Goldman Sachs SubSec of Financial Looting, Kash 'n Karry, are taking the peoples' money and handing it over to ... Goldman Sachs.

This is not merely flagrant looting. It's a declaration of war. Act accordingly -- your financial future has no value to this gang of predatory hoodlums. They'll feed every penny your children earn into their securitization meat grinder and dole out the residual tranches as food stamps and Medicaid, whilst they jet off to Antigua for the holidays with their fat rakeoffs.

Ask a Goldman Sachs i-bankster where he works. "I work for the People. Our headquarters is on Red Square."

To each according to his need, comrade. And those accumstomed to "unlimited liquidity" need a lot more than we do. Or so they would have us believe.

Me, I'd settle for "unlimited ammo" ... 

aczop's picture
aczop
Status: Member (Offline)
Joined: Sep 24 2008
Posts: 9
Re: Handouts to Wall Street Announced

Out of curiosity, have there been any policy changes that I've missed that are aimed at preventing the problems from occuring again?  Something that prevents the massive leveraging that was occuring (and other issues)?

Maybe I'm missing something, but it seems silly to garuntee these banks, and even to bail them all out now, if there hasn't been anything implemented to prevent the problem from recurring in the future.  Relying on the banks to have "learned their lesson" seems pretty silly, if that's the route they are taking?

rlee's picture
rlee
Status: Silver Member (Offline)
Joined: Sep 18 2008
Posts: 148
Re: Handouts to Wall Street Announced
[quote=cmartenson]

...  A few of those companies are not even in trouble, at all, and yet they are about to receive billions and billions of dollars.  Apparently there is a $5 billion reward for acquiring a competitor....I wonder how many knew about that when they were at the bargaining table?  I would bet quite a few of them.

...  I called this a looting operation at the outset, and my suspicions are now largely confirmed.

[/quote]

Well folks, I remember an "insider guy" back in the 80's by the name of Michael Milken.  Basically, he STOLE $1.2 Billion (with a "B") dollars, got caught, and had to pay back $200,000.!  WOW!

Fast forward to the present:  An empire steals from the entire population, openly, and the punishment?    They get PAID!

WTF?

The Land of The Free, Home of The Brave!

Bob 

davec007's picture
davec007
Status: Member (Offline)
Joined: Aug 18 2008
Posts: 2
Re: Handouts to Wall Street Announced

I have not commented up to now, but now that we see the trajectory of the Fed's "intervention", I have a few things to say.

From an energy perspective, it is now clear that any adequate response to the oil supply/price problems we will have after this U-shaped recession is over will be impossible. Most of the funds that might have been put into infrastructure changes (long-haul railroads, light rail, restructuring the geography of living & work, adding large amounts of renewables to the grid, etc.) have already been given to the banks.

The "save Wall Street to save Main Street" rhetoric has not only served to facilitate one of the largest rip-offs in history, but it has doomed the "real economy" to a state of perpetual recession, or worse. We had a taste of Things To Come when oil hit $147/barrel, and we had another in the last few weeks when crude oil production in the United States fell below 5 million barrels per day for the first time since 1946. This latter was due to the hurricane disruptions, but such production numbers will become routine after 2012. You read that correctly -- since 1946.

Stepping back for a moment, we are witnessing an historical shift as the American Empire declines and the oil producers/Asian economies assume the mantle of "progress."  So, I'm not surprised at the depravity of U.S. government actions. After all, this government has been bought & paid for. Finance people are merely getting a return on their investment.

Should foreign creditors increasingly flee from investing in the U.S., the asset inflation part will of this Dance of Death will commence. That will seal our fate because even if a goverment/private partnership could finance infrastructure changes, inflation wil destroy any such plans.

And why would the oil exporters invest their sovereign wealth funds in propping up U.S. oil demand when there are new markets for them to sell to?

In a "good news" scenario, when we are competing for oil with China, perhaps the Chinese will pay for us to re-build our energy infrastructure so we will use less of it, leaving more petroleum for them. However, in a price competition for oil, who will win? The wealthy Chinese? Or the debt-ridden United States?

I should add that Barack Obama and his energy advisers have no clue as to the dangers of our imported oil dependency.

You can now rest assured, however, that not only will most American citizens have much less wealth in the future, they will also be hard-pressed to make ends meet when the energy issues -- currently masked by the credit crisis and the current recesssion -- once again come to the fore in a few short years. And next time around, the energy crisis will never "go away" as appears to have happened this time.

Dave Cohen

(former weekly columnist, ASPO-USA)

 

 

srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Re: preferred shares not dilutive?

[quote]Steve, I thought preferred shares are nothing more than bonds under a different name.  No voting rights, a fixed dividend, that sort of thing.  And since they're bonds, they are not dilutive, since they aren't counted in the totals for EPS.[/quote]

The fact that preferred shares collect a dividend prior to common stock,  means that automatically the common stock will recieve a smaller dividend in the future.  Therefore, the dividend yield on the common stock is reduced.  Likewise in the case of asset / monetary yeild in a merger or bankruptcy preferred collect their piece of the pie.    

There isn't anyway to cut getting less money other than to call it dilutive.   Saying otherwise, is, as I have said earlier, magical Enron accounting.

[quote]

Of course, 10% isn't exactly cheap money.  Trying to make money when your cap cost is 10% will be - challenging.  But at least they'll be in business for a while longer.

[/quote] 

I wasn't aware that we knew the dividend yet.  If you know the yeild on these preferred then link please.  =)

(10% is very high, and would be a sign that Paulson was busy raping the banks rather than sodomizing the people). 

--

Steve 

Xflies's picture
Xflies
Status: Silver Member (Offline)
Joined: Aug 19 2008
Posts: 157
Oh man, see it for what it is... you can't just mandate that
executives make less, claw bonuses back if the company loses money etc.. that is ridiculous.  What they did was smart... they said that if you want money, come and get it but if you do get it, THEN we will impose these restrictions on executives.  This isn't a handout to executives, it increases a bank's capital base which they were going to do ANYWAYS but they're doing it with some hooks and trying to change executive compensation packages where they can.  My bet is that most of the naysayers and doomsayers on this board have been anti-government, anti-establishment type before, have lost money in the markets or talking up their shorts, or just misinformed and don't want to open their eyes.  I'm not long, I'm in cash just watching...  Yes, I totally agree, execs have been paid way too much and there are indeed horror stories out there but you can't have the gov't go in and ask for it back... if you want to blame anyone, blame the compensation committees... at least with this capital package, you are forced to change exec compensation which is a good thing.
srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Dividend Yield

[quote]The senior preferred shares will pay a dividend of 5 percent for the first five years and 9 percent after that, the Treasury said. The purchase price of the stock will be the market price of the banks' common shares at the time of the transaction. Companies will be able to buy back the equity at par after three years.[/quote]

Bloomberg 

That seems to answer my pressing question.  We won't make out like bandits, but this is hardly a rotten deal.  A 6%+ yield is generally considered a 'buy' (provided the banks suffer no real chance of bankruptcy).

--

Steve 

affert's picture
affert
Status: Silver Member (Offline)
Joined: Sep 22 2008
Posts: 100
Re: Handouts to Wall Street Announced

So all the big banks are getting paid billions of dollars.  What about all those small bank!?  They claim they are protecting the free market, while only supporting their friends' banks.  This mess just keeps getting more unfair!

cannotaffordit's picture
cannotaffordit
Status: Gold Member (Offline)
Joined: Jun 12 2008
Posts: 273
Re: Handouts to Wall Street Announced
Aw, c'mon folks.  The Money Masters are controlling this whole thing, and always have.  If you are commenting (or even reading) this site, you are not one of them.  So, none of us know exactly what's going to happen....except that whatever it is, it will benefit THEM, not us. It's fun to keep playing the game of guessing how its going to go.   But, the truth is they are the only ones who really know.  In the meantime, at least we have a place to express our anger.....as if it did any good.
krogoth's picture
krogoth
Status: Platinum Member (Offline)
Joined: Aug 18 2008
Posts: 576
Re: Handouts to Wall Street Announced
more like land of the naive, home of the slave
Jeff Borsuk's picture
Jeff Borsuk
Status: Silver Member (Offline)
Joined: Jul 25 2008
Posts: 150
Re: Handouts to Wall Street Announced

a new article from CNBC and what happened in the meeting with Paulson & Co with the CEO's of big banks:

http://www.cnbc.com/id/27190596/

Shocking! ...and then again, maybe not. 

 

pwoody82's picture
pwoody82
Status: Bronze Member (Offline)
Joined: Sep 26 2008
Posts: 51
Re: Handouts to Wall Street Announced

About bonds. When issued, a bond has a purchase price (par) and an interest rate. For example, say $1000 and 5%. This will yield the bondholder $50 a year during the life of the bond plus a return of the $1000 at maturity. The problem arises with long term bonds and interest rate changes. If the bond has, say, a thirty year maturity and interest rates double in the first year (to 10%), then a new bond purchased for 1000 will yield $100 a year. This has the effect of making the first bond less valuable, in fact the bond might have to be sold for as little as $500 so that it too yields 10%. There are mathematical formulas that you can use to calculate how much of a discount (or premium if rates go down) will be necessary to sell the bond before maturity. As the bond gets closer and closer to maturity the discount becomes less and less since the full $1000 will be paid when the bond matures. See:

 

http://www.precision-info.com/bondsonline/tut461876625-1.html 

 

This is the problem I have always had with long term bonds, the fact that if interest rates go down and you have to sell before maturity you could take a financial bath. So I have always gone short term so that only under the very worst conditions would I have to sell before maturity and hence take a loss because of the discount.

 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments